October 2016 Construction Report

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October 2016 Construction Report

Housing Starts, Permits Jump in October

Thursday, December 1, 2016

Housing Starts, Permits Jump in October

The latest U.S. Census figures show a sharp jump in both single- and multifamily starts in the 12 months ending in October, compared to September’s rate.

  • Some 1.323 million new housing units were started from November 2015-October 2016 on a seasonally adjusted annual rate (SAAR).
    • That figure represents an increase of 25.5% from September’s annual rate and 23.3% from the October 2015 figure.
  • Some 1.323 million new housing units were started from November 2015-October 2016 on a seasonally adjusted annual rate (SAAR).
    • That figure represents an increase of 25.5% from September’s annual rate and 23.3% from the October 2015 figure.

  • Multifamily starts of 445,000 units returned to levels seen from June-August after September’s surprisingly weak performance.
    • That rate was 74.5% higher than September’s annual rate and was up 28.2% from October 2015.

  • Single-family starts also increased dramatically.
    • The 869,000 houses that began construction on an SAAR basis were 10.7% more than September’s annual figure and 21.7% higher than October 2015’s rate of 714,000 units.

    • This is the second time the annual rate for single-family starts exceeded 800,000 units in the previous 12 months and the first time since February.

Additionally, forward-looking residential building permit issuance was up. Municipal and other authorities issued permits for 1.229 million housing units in the 12 months ending in October (seasonally adjusted), a 0.3% increase from September’s annual rate and a 4.6% rise from the October 2015 figure.

  • The 439,000 multifamily permits issued from November 2015-October 2016 represented a 1.8% decrease from September, but a 5.8% increase from October 2015.

  • The 762,000 permits for SF homes (SAAR) were up 2.7% from September and up 5.1% from October 2015. Annual SF permits have exceeded the current 12-month average of 735,000 units for the past three months.

  • The total 1.055 million residential completions were up 5.5% from last month’s revised annual rate of 1.0 million units. Single-family completions jumped 17.0% to 749,000 units from last October but annual multifamily completions slid -10.4% to 300,000 units from 335,000 in October 2015.

Other U.S. Census statistics of note: 
  • Total annual starts in October 2016 were up in all regions from October 2015, with significant gains in the West (40.2%), Midwest (24.4%) and South (20.4%). Starts in the Northeast region were up 2.2% from last year.

  • The strong gain nationally in annual single-family starts spread throughout all regions, as well, led by the West (35.2%) and South (21.4%). The smaller Northeast (16.9%) and Midwest (6.0%) regions registered solid gains.

  • Multifamily starts decreased again in the Northeast (-9.1%), but were up in the Midwest (60.0%), West (50.6%) and South (17.7%).

  • The annual rate of total permits decreased in the Northeast (-19.2%) and South (-4.2%) regions, pulled down by annual multifamily permits (-36.8% and -16.4%, respectively). The West (28.4%) and Midwest (15.9%) regions had strong gains in total permits.

  • Annual multifamily permits were up in the West (56.3%) and Midwest (28.6%) countering the aforementioned decreases in the Northeast and South.

  • As with starts, annual single-family permits were up across all four regions. The West (10.9%) led all regions, followed by the Midwest (7.5%), Northeast (5.6%) and South (2.0%).

  • Multifamily completions decreased (on a SAAR) from October 2015 in the Northeast (-57.4%) and South (-18.1%) regions, but increased in the West (20.5%) and Midwest (20.4%). Single-family completions were up strongly in the Midwest (22.0%) and South (21.9%), and moderately in the West (7.4%) and Northeast (2.1%).

Permits Up in 6 of Top 10 Metros

The top 10 Metropolitan Statistical Areas for multifamily permitting for the trailing 12 months ending October 2016 were:

All of last month’s top 10 returned, but the order changed for several. Seattle moved up from No. 6 to No. 4, moving Atlanta and Houston down one spot each. Washington, DC dropped from No. 7 to No. 10, switching places with Chicago. Denver and Austin likewise switched the Nos. 8 and 9 spots from last month.

Only four of the top 10 metros issued fewer multifamily permits in the 12 months ending in October 2016 than they did the year before. New York’s 421-a bulge continued to moderate from its peak, and Houston’s slowdown continued. Dallas and Seattle also have begun to moderate.

Because of these four metros’ declines, the annual total of permits issued in the top 10 metros, 141,215, was 20.2% lower than the 176,859 issued in the previous 12 months. Multifamily permits had been heavily concentrated in the top 10 metros, but multifamily construction is ramping up in several smaller markets as it slows in some of the top markets. The total number of permits issued in the top 10 metros was almost equal to the number of permits issued within the 11th -27th ranked metros. A year ago, permits issued in the top 10 metros almost equaled the 11th -68th ranked markets.

Access the latest permit trends tables in Excel format here.

Please contact us if you have any questions.

Jay Denton
Senior Vice President
KC Sanjay
Sr. Real Estate Economist
Chuck Ehmann
Real Estate Economist

Construction Delays Slow Multifamily Peak

The latest residential construction data suggests a housing market on the upswing, but a full recovery is still hobbled by challenges facing the construction industry, including the low availability of labor, rising construction costs, and lending restraints. As a result, the current real estate cycle’s peak levels of new supply (at the national and metro levels) are projected to occur later in 2017 than initially thought.

For starters, more construction jobs are available than at any point since late 2007. There were 221,000 construction job openings in September, up from 192,000 in August and 104,000 in September 2015. 

Zooming in on one specific construction employment category, general contractors, we can see just how the woes of the construction industry differ for single-family compared to multifamily construction.

Single-family contractor employment is well below its long-term average, while multifamily contractor employment has exceeded its long-term average since mid-2014. This aligns with what we know about the levels of development activity in the single-family and multifamily space: Apartment construction is booming, while single-family construction continues to lag behind (albeit with some steady improvement).

Not only is it more difficult to find construction workers, the cost of construction itself has been on the rise, further contributing to delays. The Producer Price Index of three key construction commodities -- ready-mix concrete, gypsum and softwood lumber -- illustrate the dramatic increase in construction materials over the last several years.

Since 2010, the price of concrete has increased by 18%, gypsum by 49% and lumber by 33%. Over the past year, those prices have increased by 3%, 1% and 8%, respectively. However, the prices of all three commodities have decreased slightly in the past month, with the price of lumber falling the farthest. Whether these downward trends continue remains to be seen.

Finally, construction delays can also be attributed to tightening lending standards, which have been particularly significant for multifamily loans.

Some 42% of senior loan officers at domestic and foreign banks with U.S. branches reported tightening loan standards on multifamily projects in the fourth quarter, according to Federal Reserve Bank survey data. This is down slightly from the 44.3% who reported tightening in the third quarter, but way up from the 7.4% reporting tightening a year ago. In fact, the start of the tightening standards only began between the third and fourth quarters of 2015. In other words, over the course of just one year, multifamily loan standards tightened dramatically. 

To some observers of the industry, the tightening lending standards for multifamily are indicative of an actual construction recession in the near-term, particularly when viewed alongside construction spending in the aggregate, although Axiometrics does not subscribe to this theory.

Residential construction spending grew by only 0.6% in September 2016 compared to the year prior, down from 1.8% in August and 4.2% in July. On the non-residential side, construction
spending actually fell on an annual basis, the first negative growth rate since summer 2013.

Because the multifamily lending environment tends to be a leading indicator for later construction spending, the sharp increase in the share of loan officers reporting tighter lending standards indicates that the slowdown in construction spending is just the beginning, and further declines are to be expected. 

Taken altogether, the low availability of construction labor, rising construction costs and tightening lending standards contribute to construction delays at the national and metro levels, with each metropolitan area impacted differently.

One year ago, we forecasted that the peak in national supply would arrive in the first quarter of 2017; now, we project peak supply to occur one quarter later, in the middle of 2017. The metro areas with the longest construction delays (measured as the difference between peak supply projections one year ago with peak supply projections today) are listed in the table at above right.

By the Numbers

The table below shows multifamily permitting and job gain/growth for some of the top metropolitan areas, with several categorized by state or region.

The table below highlights multifamily permitting by place.

Some of the top places on a trailing 12-month basis through October 2016 were:

  • City of Los Angeles (13,117 units)
  • City of Chicago (8,626 units)
  • City of Dallas (8,497 units)
  • City of Seattle (8,442 units)
  • Borough of Brooklyn (7,990 units)
  • City of Atlanta (7,562 units)
  • City of San Diego (6,203 units)
  • City of Houston (5,929 units)

The top 40 places (out of 4,147 U.S. Census places) for permitting of properties with five or more units were:

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